The Dysfunctional Credit Market

One of the problems with a credit crisis is that it's much harder to track fixed-income markets than it is stock markets. Name a stock or a stock index, and it's easy to see how prices reacted to every minute of the big vote yesterday. Try to find an intraday chart of T-bills, however, or credit spreads, and it's much harder. And Libor is fixed only once a day, which is about a week in market time.

Given the paucity of credit information online, John Jansen's blog is invaluable these days. Here he was yesterday afternoon:

The yield on the 2 year note rotated through a mini interest rate cycle as its yield tumbled 37 basis points to 1.73 percent.

It's a powerful point: the movements on Treasury bonds yesterday were larger than the average rate cut. This morning, the yield on the 2-year had "climbed 13 basis points to 1.79 percent", implying that at the official close yesterday was even lower than Jansen had indicated, at 1.66%.

Later this morning, Jansen dropped an even more eye-popping datapoint: the Fed funds rate, which is targeted at 2%, opened "at 6 ½ to 7 percent" before starting to move downwards -- something Jansen's "money market mole" calls "the most dysfunctional market that he has witnessed in 20 years".

And this is even scarier:

Trading today has been limited to overnights with virtually no term trades.

Some small part of that might be due to the fact that today's the last day of the quarter; things might pick up a little tomorrow. Or, on the other hand, they might not.

So I'm glad that broad stock-market indices are up 4% today. But looking at the credit markets, things are still very bad indeed. Remember, the equity markets have been overoptimistic during the entire history of this crisis. They're not really to be trusted.